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The Commissioner of Wealth-tax Vs. Dr. E.D. Anklesaria - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberWealth Tax Reference No. 5 of 1962
Judge
Reported inAIR1964Guj240; (1964)0GLR1061; [1964]53ITR393(Guj)
ActsWealth Tax Act, 1957 - Sections 2; Succession Act - Sections 174
AppellantThe Commissioner of Wealth-tax
RespondentDr. E.D. Anklesaria
Appellant Advocate J.N. Thakore, Adv. General, i/b.,; M.M. Thakore and; M.G
Respondent Advocate K.H. Kaji, Adv.
DispositionAnswer in affirmative
Cases ReferredWilson Hurtley v. Marie Curie Hospital
Excerpt:
direct taxation - annuity - section 2 of wealth tax act, 1957 and section 174 of succession act - whether annuity granted to assessee by deceased by testamentary disposition exempt from computation of net wealth under section 2 (e) (iv) - section 174 not applicable to present case to entitle assessee to call upon trustees to commute annuity into lumpsum grant - terms and conditions relating to annuity preclude commutation of annuity into lump sum grant - as such annuity covered under section 2 (e) (iv) entitled to exclusion from computation of net wealth. - - 1. a short but interesting question of law arises on this reference made at the instance of the commissioner of wealth-tax under section 27(1) of the wealth tax act. (a) to provide help for poor and deserving zorostrian parsees,.....bhagwati, j.1. a short but interesting question of law arises on this reference made at the instance of the commissioner of wealth-tax under section 27(1) of the wealth tax act. the question is whether the annuity granted to the assessee by his deceased father by testamentary disposition is an annuity which. is exempt from computation of net wealth under section 2(e)(iv) of the act. dr. anklesaria the deceased father of the assessee died on 27th april 1954 having duly made testamentary disposition contained in three testamentary papers, one a will dated 8th may 1934, the other a draft deed of trust which did not bear any date but appeared to have been prepared in 1944 and the third a will dated 25th april 1944. dr. anklesaria had also executed during his life time a deed of trust dated.....
Judgment:

Bhagwati, J.

1. A short but interesting question of law arises on this Reference made at the instance of the Commissioner of Wealth-tax under Section 27(1) of the Wealth Tax Act. The question is whether the annuity granted to the assessee by his deceased father by testamentary disposition is an annuity which. is exempt from computation of net wealth under Section 2(e)(iv) of the Act. Dr. Anklesaria the deceased father of the assessee died on 27th April 1954 having duly made testamentary disposition contained in three testamentary papers, one a will dated 8th May 1934, the other a draft deed of trust which did not bear any date but appeared to have been prepared in 1944 and the third a will dated 25th April 1944. Dr. Anklesaria had also executed during his life time a deed of trust dated 24th June 1937 tinder which a sum of Rs. 1,00,000/- had been transferred by him to the trustees for various purposes including giving of certain annuities to his sons, daughters and grand-children. Dr. Anklesaria had also executed a supplementary deed of trust dated 2nd December 1938, making certain alterations in the dispositions made under the deed of trust dated 24th June 1937 in exercise of the power reserved to him under the latter deed. The draft deed of trust purported to make certain further alterations in the dispositions effected under the deed of trust dated 24th June 1937 but it was not executed by Dr. Anklesaria nor were the formalities of law complied with which would make it an effective deed of trust. It remained a draft until the death of Dr. Anklesaria, but by the will dated 25th April 1944, the draft deed of trust was given the effect of a testamentary paper and the provisions contained in the draft deed of trust together with the will dated 25th April 1944 declared various testamentary dispositions of Dr. Anklesaria. The draft deed of trust was also, therefore, probated along with the two wills dated 8th May 1934 and 25th April 1944 By reason of the draft deed of trust and the will dated 25th April 1944, a further sum of Rs. 8,00,000/- was added to the funds forming part of the deed of trust dated 24th June 1937 and certain alterations were effected in the dispositions effected under the deed of trust dated 24th June 1937. Out of the total amount of Rs. 9,00,000/- made up of Rs. 1,00,000/- being the original fund forming tie subject-matter of the deed of trust dated 24th June 1937 and Rs. 8,00,000/- added by the draft deed of trust read with the will dated 25th April 1944 a sum of Rs. 2,00,000/-was to be applied for the purpose of a Pharmacy College whereas the remaining sum of Rs. 7,00,000/- was to be held on the trusts contained in the deed of trust dated 24th June 1937 as altered by the draft deed of trust and the will dated 25th April 1944. Clause 5 of the deed of trust dated 24th June 1937 as altered by the draft deed of trust and the will dated 25th April 1944 was, when translated in English, in the following terms:

'5. The trustees shall as from the 1st day of January 1945 utilise only the net income arising out of the trust property for the purposes mentioned in Clause 7 hereof.'

Clause 7 of the deed of trust dated 24th June 1937 was also altered by the draft deed of trust as a testamentary disposition and so altered it read in its English translation:

'7. The Trustees shall as from the day of 1944 utilise the net income arising out of the trust property for the following purposes:

(A) A sum of Rs. 6,000/- shall be paid every year to the Settlor Dr. Dhanjisha Edalji Anklesaria during his life time.

(B) A sum of Rs. 3,600/- shall be paid every year to each of my sons, namely, Jehangir D. Anklesaria, Rustomji D. Anklesaria and Edalji D. Anklesaria, during their respective lives and after their respective life-times, the said sums shall be paid to their respective children every year to be divided equally between them.

(C) Upon the marriage of my sons, the said Rustomji and Edalji respectively, a sum of Rs. 15,000/- shall be paid to each of them to enable them to meet with their marriage expenses.

(D) A sum of Rs. 2,400/- shall be paid every year to my daughter Shirinbai Dungaji Daruwala during her life time and after her death the said sum shall be paid every year to her children to be divided equally between them.

(E) A sum of Rs. 600/- shall be paid every year to each of my sons and daughters who may be the Managing Trustees hereof so long only as they shall act as such Managing Trustees.

(F) A sum of Rs. 200/- shall be paid every year to each of the Trustees hereof other than Managing Trustee or Trustees so long as they shall act as such Trustees.

The above annuities shall be paid by either monthly or quarterly instalments, the first of which shall be payable after one year from the date of execution hereof.

The Trustees shall hold the balance of the income of the Trust property after payment of the above sums upon trust to utilise the same as and when they may think advisable for the following objects:

(a) To provide help for poor and deserving Zorostrian Parsees, by giving them free scholarships or loans at 4 per cent per annum, in obtaining primary, secondary or higher education in India, or Scientific, technical or professional education in India or in foreign countries, or in obtaining any industrial training.

(b) To provide help for poor Zorostrian Parsees by giving them medical help, food, clothes etc.

(c) To provide help for Parsee Orphanages by giving scholarships or otherwise.

(d) To provide help for the victims of any natural calamity such as fire, flood, famine etc. or other calamities such as war, riots, etc. irrespective of the caste, creed or religion of the objects to be benefited.

(e) For such other charitable objects as the Trustees may select, irrespective of the caste, creed or religion of the objects to be benefited.

Provided, however, that with respect to the charities mentioned in Sub-clauses (a) and (b) above the Trustees shall give preference to the following classes of objects in the order in which they are hereinafter mentioned:

(1) The children and grand-children and other descendants of the Settlor and of the Settlor's brothers and sisters.

(2) The children and grand-children and other lineal descendants of the brothers and sisters of the Settlor's wife Bai Gulbai.

(3) The children and grand-children and other lineal descendants of the Settlor's uncles both paternal and maternal.

(4) The children and grand-children and other lineal descendants of the uncles of the Settlor's said wife Bai Gulbai, both paternal and maternal.

(5) Any other Zorostrian Parseea.'

Of course since the draft deed of trust became effective as a testamentary disposition only from 27th April 1954 when Dr. Anklesaria died. Clauses 5 and 7 in the form set out above became operative as from 27th April 1954 but with this modification that so far as Sub-clauses (b) and (d) of Clause 7 were concerned, a further change was made by Dr. Anklesaria by the will dated 25th April 1944 and this is what he provided in the will, according to its English translation:

'Out of the said sum, I have reserved Rs. two lacs for establishing a Pharmacy College for the public and as for the remaining sum, I have directed the same to be utilised in giving annuities to my children and for certain other charitable purposes in accordance with the aforesaid draft of the trust deed. I have made the following alterations in the annuities which I have directed in the same draft to be given to my children. My three sons shall each be paid Rs. 500/- in words Rupees five hundred per month and my daughter Shirinbai shall be paid Rs. 300/- in words rupees three hundred per month and my other three daughters shall each be paid Rs. 100/- in words rupees one hundred per month'.

After the death of Dr. Anklesaria, a question arose whether the increase of the amount of the annuity given to the sons from Rs. 300/- to Rs. 500/- also enured for the benefit of the respective children1 of the sons who were provided with an annuity after the death of the sons. A similar question also arose in regard to the annuity given to Shiriabai, daughter of Dr. Anklesaria. It appears that there were also certain other questions in regard to the administration of the trust which required to be solved and an originating summons was, therefore, taken out for the determination of various questions including the aforesaid two questions relating to the annuities. The originating summons was heard by Mr. Justice N.A. Mody of the High Court of Bombay and by a judgment dated 10th February 1958, the learned Judge held that the increase from Rs. 300/- to Rs. 500/- in the case of the sons and from Rs. 200/- to Rs. 300/- in the case of Shirinbai applied not only to the annuities in favour of the sons and Shirinbai respectively but also enured for the benefit of their respective children. The learned Judge observed that there was one single continuing annuity in favour of each of the sons during his life time and thereafter in favour of his children and similarly there was a single continuing annuity in favour of Shirinbai and thereafter in favour of her children and that when Dr. Anklesaria increased the amount of the annuity in both the cases; such increase was not only for the benefit of the sons and Shirinbai who were the first takers of the respective annuities granted to them but also for the benefit of their children who were the second takers. We have referred to this decision at this stage because some reliance was placed upon it by the learned Advocate General appearing on behalf of the Commissioner, presumably with a view to distinguish the present case from the two decisions of the English Courts which were relied upon by the Tribunal in deciding the matter against the Commissioner.

2. In the course of the assessment of the assessee to wealth-tax for the assessment year 1958-59 for which the valuation date was 3ist March 1958, a question arose whether the annuity granted to the assessee under the testamentary dispositions referred to above was exempt under S 2(e)(iv) of the Act. The assessee contended that the terms and conditions relating to the annuity were such that they precluded the commutation thereof into a lump sum grant and that the annuity was, therefore an annuity which satisfied the description given under Section 2(e)(iv) and was accordingly exempt from wealth-tax. The Wealth Tax Officer, however, rejected this contention of the assessee holding that the assessee had a right to have the annuity commuted into a lump sum grant and that the exemption, therefore, did not apply so as to exclude the annuity from computation of net wealth of the assessee. The assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that it was entirely immaterial whether or not the assessee- was entitled to call upon the trustees to commute the annuity into a lump sum grant, for in any view of the matter the annuity could always be commuted into a lump sum grant by outsiders like Insurance Companies and that the annuity, therefore, did not come within the category specified in Section 2(e)(iv). The assessee thereupon preferred an appeal to the Tribunal. The Tribunal rightly observed that the Appellate Assistant Commissioner had completely fallen into an error in considering the matter from the point of view whether the annuity was one which could be computed in terms of immediate cash by outsiders like Insurance Companies and that the only question which was required to be considered was whether the assessee was entitled to call upon the trustees to commute the annuity into a lump sum grant and this, observed the Tribunal, the assessee had no right to do and the annuity was therefore, one which fell within Section 2(e)(iv). The Tribunal held that there was a continuing annuity in favour of the assessee with a gift-over in favour of his children and the assesses was, therefore, prevented from receiving the cash value of the annuity from the trustees. The Tribunal in this view of the matter upheld the assessee's claim to exemption in respect of the value of the annuity. We may point out at this stage that the Wealth Tax Officer when he decided against the assessee computed the value of the annuity at Rs. 55,770/- having regard to well-established principles of valuation and the Appellate Assistant Commissioner also confirmed this valuation. This valuation was not challenged by the assessee before the Tribunal but the only challenge was against the inclusion of this valuation in the net wealth of the assessee and the challenge was based on Section 2(e)(iv). It was this challenge based on Section 2(e)(iv) which was upheld by the Tribunal and on this Reference made at the instance of the Commissioner of Wealth Tax, the view of the Tribunal upholding this challenge is assailed before us.

3. The question turns not so much upon the true interpretation as upon the application of Section 2(e)(iv). That Section is in the following terms :

'2. In this Act unless the context otherwise requires--

X X X X X X(e) 'assets' includes property of every description, movable or immovable, but does not include-

x x x x x x(iv) a right to any annuity in any case where the terms and conditions relating thereto preclude the commutation of any portion thereof into a lump sum grant;x x x x x x

The question which, therefore, arises for consideration, is whether it can be said of the annuity in the present case that the terms and conditions relating to the annuity preclude the commutation of any portion thereof into a lump sum grant. Now the annuity is given to the assessee by the deed of trust dated 24th June 1937 as altered by the draft deed of trust read with the will dated 25th April 1944, the effective date of the provision granting the annuity being the date of the death of Dr. Anklesaria, namely, 27th April 1954. We must, therefore, see what are the terms and conditions relating to the annuity contained in the deed of trust dated 24th June 1937, the draft deed of trust and the will dated 25th April 1944. Is there anything in the terms and conditions which precludes the assesses from requiring the trustees to commute the annuity or any portion thereof into a lump sum grant? The scheme of the trusts contained in the deed of trust dated 24th Tune 1937 read with the draft deed of trust and the will dated 25th April 1944 is that a sum of Rs. 9,00,000/- is settled on trust out of which Rs. 2,00,000/- are to be utilised for establishing a Pharmacy College and the balance of Rs. 7,00,000/-is to be held on trust for the objects set out in the amended Clause 7 which we have reproduced above. Before we come to Clause 7, we may point out that Clause 5 in terms declares that the trustees shall utilise only the net income arising out of the trust property for the purposes mentioned in the amended Clause 7. Clause 6 of the deed of trust dated 24th June 1937 which did not suffer any change as a result of the draft deed of trust and the will dated 25th April 1944, also provides that the trustees shall utilise only the net income and shall not touch any part of the corpus of the trust fund. Clause 7 then says that the net income from the trust fund shall he utilised for giving certain annuities, one of the annuities being the annuity of Rs. 500/- to the assessee and that the balance of the net income shall be utilised by the trustees for charitable objects set out in Sub-clauses (a) to (e). The corpus of the trust fund is thus to remain untouched and only the net income is to be utilised by the trustees for giving annuities to sons daughters and grand-children and the balance of the net income is to be utilised for charitable purposes. It is, therefore, clear that so far as the annuity to the assessee is concerned, it is to be paid only out on the net income of the trust fund and no part of the corpus is at any time to be utilised for the purpose of paying it to the assessee. It is in this context that we have got to see whether the terms and conditions relating to the annuity permit or prevent the commutation of the annuity into a lump sum grant. Now if the assessee were entitled to call upon the trustees to commute the annuity into a lump sum grant there would obviously be a breach of trust, for the trustees are expressly directed by the provisions contained in the deed of trust dated 24th, June 1937 as amended by the draft deed of trust and, the will dated 25th April 1944 not to touch any part of the corpus of the trust fund and to utilise only the net income for the purposes mentioned in Clause 7 which would include payment of annuity to the assessee. These provisions clearly, in our opinion, preclude the assessee from calling upon the trustees to pay him the value of the annuity in a lump sum. If the assessee calls upon the trustees to do any such thing, the trustees can immediately rejoin by saying that they are not permitted by the trust to do that which the assessee wants them to do, for all that they can do is to pay the various annuities set out in Clause 7 out of the net income alone and utilise the balance of the net income for various charitable purposes. If the trustees apply any part of the corpus of the trust fund for payment of the commuted value of the annuity, they would be guilty Of breach of trust and equally if they apply any part of the net income of the trust fund for such purpose, then to the extent to which such payment exceeds Rs. 6,000/- they would be committing breach of trust, for they would be diverting the net income of the trust fund to purposes other than those provided by the trust. If, therefore, regard be had only to the terms and conditions relating to the annuity contained in the deed of trust dated 24th June 1937 as amended by the draft deed of trust and the will dated 25th April 1944, it is apparent that they preclude the commutation of the annuity into a lump sum grant and the annuity, would in that event fall within the category specified in Section 2(e)(iv).

4. But, argued the learned Advocate General, regard must also be had to the provisions of the Indian Succession Act and particularly Section 174 which according to him enables the assessee to call upon the trustees to commute the annuity into a lump sum grant. The learned Advocate General also in the alternative contended that in any event where an annuity is granted, the annuitant can always call upon the trustees to pay the cash value of the annuity unless there is a gift-over which in this case there was not. We shall presently consider both these contentions of the learned Advocate General, but before we do so, it is necessary to briefly set out what we apprehend to be the true rules on the subject as found from various decisions of the English Courts. We may at once point out that so far as the law of Succession is concerned, the rules evolved by English Courts are very often based on technical rules peculiar to the development of the English Law of Inheritance and they should not, therefore, be allowed to control the plain and grammatical meaning of the provisions of the Indian Succession Act which, is the law applicable in India governing testate succession of a large majority of the people, but we cannot overlook the fact that many of the rules codified in the Indian Succession Act are based upon the rules of English law and the rules of English law where they are not based on any technicalities but are based on general principles can be referred to profitably for the purpose of understanding the true meaning and effect of the relevant provisions of the Indian Succession Act.

5. Now an annuity is a right to receive de anno in annum a certain sum; it may be given for life or for a series of years or during any particular period or in perpetuity. Ordinarily when an annuity is given to a person, it is prima facie an annuity for life unless a contrary intention is manifest in the instrument granting tbe annuity. This general rule applies even where the testator, in bequeathing annuities to persons in succession, uses the words 'for life' in one part of the bequest and omits them in another. If for example an annuity is given to A for life, and after his death to B, B will take the annuity for life only, in the absence of any indication that he is to take a different interest. In the present case the annuity is given to the assessee for his life and thereafter to his children in equal shares. The annuity will, therefore, enure for the life of the assessee and after the death of the assessee it will enure for the respective lives of the children and thereafter it will come to an end. There are diverse ways in which an annuity may be granted. An annuity may be granted which may be payable out of the estate of the testator or a particular fund may be indicated by way of security for payment of the annuity. There is also another way in which an annuity may be given and it is that a bequest may be given of a sum of money to provide an annuity by purchasing it or a direction may be given to purchase an annuity of a certain amount. Different consideration will apply in respect of these two modes of granting annuities. We will first examine the latter mode. Where there is a bequest of a sum of money to be laid out for purchasing an annuity, the annuitant is entitled to have the money, because the annuity might at once be sold, and it would be idle to compel the annuitant to have an annuity which he could resell. (See Jannan on Wills, Eighth Edition, page 1123). The principle behind this rule may be stated in the words of Kekewich J.., in In re Mabbett, (1891) I Ch. 707, as follows:

'The right of the annuitant to the money accrues so soon as the money is available for the purchase of the Government annuity, and equity, treating that as done which ought to be done, considers it available even though the estate out of which it is to be purchased has not been sold, provided there is a direction for sale amounting to conversion, so that the legatee takes through the medium of the Government annuity a. share of the proceeds of sale the property being treated as immediately sold. That is neatly expressed in Palmer v. Craufurd, (1819) 3 Swan 483 where the Master of the Rolls, Sir Thomas Plumer, says, 'The cases of Bayley v. Bishop, (1803) 9 Ves. 6, Yates v. Compton (1725) 2 P. Wins. 308, and Barnes v., Rowley, (1797) 3 Ves. 305, have established, that where money is bequeathed to be invested in the purchase of an annuity for the life of the legatee, and the legatee dies before it is laid out, or even, as in (1803) 9 Ves 6 before the fund is available, as during the life of the person after whose death the investment is to be made, yet still it is a vested legacy from the death of the testator; and that the legatee for whose benefit it was intended, having survived the testator, may elect either to take the sum, or have it laid out in an annuity.'

We have quoted this passage for it clearly shows that where a sum of money is bequeathed to be invested in the purchase of an annuity for life of the annuitant, it is that sum of money which is really given to the annuitant who takes it through, the medium of an annuity and in such a case the bequest vests in interest in the annuitant immediately and the annuitant is entitled either to lake that sum of money or to have it laid out in purchasing an annuity. The legal consequence which flows from the immediate vesting in interest in the annuitant is that even if the annuitant dies without receiving the sum of money, the heirs of the annuitant, are entitled to the sum of money. The same position also obtains where there is a direction to purchase an annuity of a certain amount and as observed by Jarman at page 1124,

'there is no difference in this respect between a gift of a certain sum to be laid out in the purchase of an annuity and a direction to purchase, an annuity of a certain amount'.

In either case what is really intended to be given to the annuitant is a particular sum of money though in the form of an annuity and since the annuity can at once be sold by the annuitant and he can realise the value of it, the law says that there is no point in compelling the annuitant to have the annuity by requiring the trustees to to lay out the sum of money in purchase of the annuity but the annuitant may, if he so wants, have the sum of money itself, and this rule is applied even where the instrument granting the annuity expressly declares that the annuitant shall not be allowed to accept the value of the annuity in lieu thereof. Notwithstanding such a provision in the instrument, the annuitant can require the trustees to give him the sum of money which is bequeathed for purchase of an annuity for him or which is required for the purchase of the annuity; granted to him. If, however, there is a condition that the annuity shall cease on alienation and that there shall be a gift-over, the annuitant is not entitled to call upon the trustees to pay him the cash value of the annuity for in such a case there being a condition of defeasance, it cannot be said that what was intended to be given to the annuitant was the sum of money absolutely albeit in the form of an annuity. That was the position in the case of Hatton v. May, (1876) 3 Ch. D. 148. There the testator directed his executors to purchase an annuity of 100 sterling for one Marv Ann May and provided that she should not be entitled to elect to receive the cash value of the annuity in lieu thereof. Now this by itself would not have been enough to preclude Mary Ann May from demanding the cash value of the annuity. But there was another clause in the will which provided that if she at any time sold assigned, incumbered or in any wise disposed of or anticipated the annuity, or any part thereof, the same should cease and be void, and should sink into the residue. Having regard to this provision in the will, Vice-Chancellor Malins held that Mary Ann May was not entitled to the value of the annuity for there was a gift-over in case she did any of the acts aforementioned. The provision for gift-over showed that the amount required for purchase of the annuity was not given to her absolutely bat there was a condition of defeasance and because of the condition of defeasance, she could not claim the amount. If she was given the amount she might conceivably get something to which she might ultimately turn out not to be entitled. To the same effect observed Vice-Chancellor Malins in Roper v. Roper, (1876) 3 Ch. D. 714, where he said

'I laid down the rule in the recent case of (1876) 3 Ch. D. 148 that where there is merely a declaration that the widow shall not have the value of her annuity, that goes for nothing; but In order to prevent her having the value there must be a gift over.'

The observations in both these cases were made in reference to a situation where there is a bequest of a sum of money to be laid out in the purchase of an annuity or there is a direction to purchase an annuity of a certain amount and that is how Jarman refers to these cases at page 1123 in his book on Wills, Eighth Edition, and Williams at page 690 in his book on Executors and Administrators, Fourteenth Edition.

6. But where there is no bequest of a sum of money to be laid out in the purchase of an annuity or any direction to purchase an annuity of a certain amount and there is a simple bequest of an annuity the annuitant cannot require the trustees to pay up the cash value of the annuity. The principle applicable to cases of this kind is stated in Williams on Executors and Administrators. Fourteenth Edition, at p. 169 as follows:

'Where one of the liabilities of the testator's estate is a life annuity, the annuitant is not, in the administration of the estate, entitled to the value of the annuity as a gross sum'.

The decision relied on in support of this proposition is that in Yates v. Yates (1860) 28 Beav. 637: 54 ER 511. In that case'a testator devised estates in trusts for his wife for life, and he gave the trustees a discretionary power of sale. Part of his estate consisted of unproductive building ground, which remained unsold for some years. There was also a liability on the testator's estate for a life annuity in favour of the wife. The question arose whether in the administration of the estate, the annuitant was entitled to the value of the annuity in a gross sum. The Master of the Rolls held that the annuitant was not entitled to have the value of the annuity paid to her and observed:

'Where a creditor or legatee is entitled to have an annuity purchased at once, he is entitled to the sum necessary to purchase it, for the Court does not require the money to be invested in an annuity which the annuitant may sell the moment afterwards. But if a testator simply covenants to pay on annuity or bequeaths one out of his estate, though the corpus of his estate may be liable if the rents are insufficient to keep down the growing payments of the annuity, and may be sold for that purpose, yet it does not follow, if the estate is sufficient and the payments are made, that the, creditor is entitled to come and require a portion of the estate to be sold, for the purpose of having the value of his annuity paid. In point of fact the covenant is performed by the payment of the annuity. There are two matters to be considered in that case. Where the legatee is entitled to have an annuity bought, the Court gives the annuitant a sum of money instead of it. But if the testator has entered into an obligation to pay an annuity, the annuitant cannot have more than what he would be entitled to at law, and a judgment at law would entitle him to the arrears only and not to have the value of the annuity paid to him.'

This decision clearly shows that there is a distinction in principle between a case where a sum of money is bequeathed for being laid out in purchase of an annuity or there is a direction for purchase of an annuity of a certain amount and a; case where there is a simple obligation to pay an annuity out of the estate or out of any particular part of the estate. Whereas in the former case the bequest being really of the sum of money to be aid out for purchase of the annuity, the annuitant is entitled to have the sum of money instead of having it invested in the annuity, in the latter case the annuitant cannot require the value of the annuity to be paid to him for what is bequeathed to him is an annuity and not the sum of money necessary to purchase the annuity. This decision, therefore, clearly shows that in a case where there is a simple bequest of an annuity, whether such Annuity be payable out of the estate of the testator generally or out of any particular part of the estate the annuitant cannot require the trustees to pay up the value of the annuity; he must have the annuity from year to year as and when it Jails due and not in a lump sum grant.

7. If these rules of English Law which are well settled are borne in mind, there is really no difficulty at all in arriving at the true interpretation of Section 174 of the Indian Succession Act. We again wish to make it clear that we do not refer to these rules of English law for the purpose of construing the language of Section 174 but for the purpose of understanding what was the state of the law when Section 174 was enacted and what is the provision which that Section was intended to enact. Section 174 is in the following terms:

'174. Where the will directs that an annuity shall be provided for any person out of the proceeds of property, or out of property generally, or where money is bequeathed to be invested in the purchase! of any annuity for any person, on the testator's death the legacy vests in interest in the legatee, and he is entitled at his option to have an annuity purchased for him or to receive the money appropriated for that purpose by the will.'

This Section on a plain and grammatical construction declares that where a will directs that an annuity shall be provided for any person out of the proceeds of property, or out of property generally, or where money is bequeathed to be invested in the purchase of any annuity for any person, on the testator's death two consequences follow: (1) the legacy vests in interest in the annuitant; and (2) the annuitant can at his option have an annuity purchased for him or receive the money appropriated for that purpose by the will. The legal effect of the first consequence which is illustrated by the second illustration to the Section is that even though the annuitant may die before the annuity is purchased for him or he is given the money appropriated for the purpose by the will, the legacy would pass on his death by testamentary or intestate succession and his heirs or legatees, as the case may be would be entitled to the legacy which would be the money appropriated for the purpose by the will. The second consequence clearly contemplates an alternative between two rights. The first right is to have an annuity purchased while the second right is to receive the money appropriated for the purpose by the will. Both these clearly contemplate that there is a sum of money appropriated by the will for the purpose of providing the annuity and the annuitant is entitled either to have that sum of money or to have an annuity purchased for him with that sum of money. The case contemplated by Section 174 is, therefore, a case where a sum I of money is to be utilised for providing an annuity to an annuitant either by a direction that an annuity of a particular amount shall be provided for the annuitant or by a bequest of that sum of money for being laid out in the purchase of an annuity for the annuitant. In either case the sum of money is to be utilised and exhausted for the benefit of the annuitant by providing an annuity to him and when this is the case, the legacy really being of that sum of money though through the medium of an annuity, the legacy vests in interest in the annuitant immediately and the annuitant can at his option either have that sum of money utilised for purchasing an annuity or have that sum of money absolutely in a lump sum. It will, therefore, be seen that what Section 174 embodies is the same rule of English law to which we have referred a little earlier namely, that where there is a bequest of a sum of money to be laid out in the purchase of an annuity or there is a direction to purchase an annuity of a certain amount, the annuitant can require the trustees to pay up the value of the annuity rather than have the annuity purchased for him. Section 174 has no application where there is a simple bequest; of an annuity without any bequest of the sum of money necessary to purchase the annuity. In such a case where there is a simple bequest of an annuity, whether such annuity be charged upon the income of the estate or the corpus in case of deficiency of income, the annuitant is not entitled to call upon the trustees to pay to him the value of the annuity. This position is sustainable on principle and is also borne out by a decision of the English Court in Wright v. Callender, (1852) 2 De G. M. and G. 652: 42 ER 1027, where it was decided that in the ordinary case where there is a simple gift of an annuity with a direction to se aside a fund to answer it, the annuity being chargd on capital as well as income and there being a gift over of the residue of the estate, the right) of the annuitant and the other persons interested is to have the directions of the testator carried into effect and if the estate is not sufficient to pay the annuitant in full, he is entitled to have the deficiency made up out of capital, but he must take the estate as it stands and is not, except with the consent of the persons entitled to the residuary estate, to have the value of the annuity paid over to him. The setting apart of the fund in such a case is merely the means by which the object of giving the annuity is to be secured and even though the annuitant is entitled to have resort to capital in the event of deficiency of income for the purpose of payment of the annuity, the annuitant cannot according to this decision, claim to have the value of the annuity paid to him. Simonds J., also laid down the same proposition in In re Cox, Public Trustee v. Eve. 1038 Ch. 556, when he said at P- 562:

'It is also clear that where the contest is .... between an annuitant and th'e residue, the annuitant is not entitled to have his annuity valued and the amount of the valuation paid to him'. The reason is obvious. The annuitant is entitled as between himself and the residuary legatee to have the whole income and, so far as is necessary, the corpus applied in payment of the annuity; the residuary legatee can get nothing until the annuity is paid in full. See (1852) 2 De. G.M. and G. 652: 42 ER 1027. But the annuitant can get nothing more than this,'

The principle underlying this proposition is that in a case where there is a simple bequest of an annuity, then even though a fund may be directed to be set apart to answer the annuity, and the annuity may be charged on capital as well as income, the annuitant cannot demand payment of the value of the annuity for what is bequeathed to him is not the sum of money necessary to purchase the annuity but merely the annuity to be paid out of income and in case of deficiency of income, out of capital. The annuitant can, therefore, get only the annuity and not the value of the annuity,

8. The learned Advocate General relied upon two decisions of the Court of Chancery, one being a decision of Farwell J. in In re Farmer, Nightingale v. Whybrow, (1939) Ch, 573 and the other being a decision of Bennett J., in In re Wilson Hurtley v. Marie Curie Hospital, (1940) 1 Ch. 966. Both these cases dealt with a situation where there was insufficiency of assets for payment in full of the annuity and the pecuniary legacies and the question was as to whether the annuity was liable to abate along with the pecuniary legacies. In both the cases the annuity was charged not only on income but also on capital and the persons entitled to the gift-over after payment of the annuity were, entitled to the corpus after payment in full of the annuity. Since their right to tie corpus was subject and subsidiary to the interest of the annuitant, it was held that the annuitant was entitled to be paid in full even at the cast of drawing upon the corpus but the estate of the testator being insufficient it was not possible to set aside securities producing an income sufficient to satisfy the annuity as also to pay the pecuniary legacies and the general rule of administration was, therefore, applied, namely, that where the estate of the testator is insufficient to pay in full an annuity and pecuniary legacies, the annuity Mast be valued and the value abated proportionately with the pecuniary legacies. Both these cases were cases where the estate of the testator was insufficient and a mode of administration of the estate had, therefore, to be devised by which the rights of the annuitant and the pecuniary legatees could be equitably worked out by proportionate abatement of the annuity and the pecuniary legacies and the only way in which this could be done was by valuing the annuity, subjecting the amount of the valuation to an abatement in proportion, to the abatement of the pecuniary legacies and paying over the abated value of the annuity to the annuitant and the abated value of the pecuniary legacies to the pecuniary legatees. Where however, the estate of the testator is sufficient as in the present case, the principle laid down in these two decisions cannot possibly apply. In such a case the annuitant can have only the annuity and not the value of the annuity. The analysis of the legal position which we have set out above is amply borne out by the following passage from Halsbury's Laws of England. (Third Edition), Volume 33, page 547, Article 929:

'In the case of a simple bequest of a life annuity, where the testator's estate is sufficient, the annuitant cannot claim to be paid in cash the value of the annuity; but he can claim to have such a security set apart as will make it practically certain that the annuity will be paid. Where the estate is insufficient, the annuitant can claim that the annuity shall be valued, and that the amount of the valuation, subject to an abatement in proportion to the abatement of the pecuniary legacies shall be paid to him in cash.....'

The question with which we are concerned in the present Reference is whether in the case of a simple bequest of a life annuity, where the testator's estate is sufficient, is the annuitant entitled to be said in cash the value of the annuity and this question is, as we have pointed out above, covered by the decision in (1852) 2 De G.M. and G. 652: 42 ER 1027, where even though the annuity was charged upon capital as well as income, the Court held that the annuitant is not entitled to require the value of the annuity to be paid to him.

9. This being the position we must see in which of the categories of annuities referred to above the present annuity falls. There is as we have already pointed out no bequest of a sum of money to be laid out in the purchase of an annuity for the asses-see nor is there any direction to purchase an annuity of the sum of Rs. 6,000/-. Far from this being the position the deed of trust dated 23rd June 1947 read with the draft deed of trust and the will dated 25th April 1944 clearly says that the annuity is to be paid to the assessee out of the net income of the trust fund and that the balance of the net income after paying the annuity to the assessee and the other annuities mentioned in Clause 7 is to be utilised for charitable purposes and that in no event is the corpus of the trust fund to be touched. The annuity is nothing but a simple annuity to the assessee charged only on the net income of the trust fund and if the assessee dies, the annuity to him ceases and no part of the corpus of the trust fund passes to his heirs. Section 174 of the Indian Succession Act, therefore, does not apply to the facts of the present case nor does any Rule of English law apply so as to entitle the assessee to call upon the trustees to commute the annuity into a lump sum grant. We are, for these reasons, of the opinion that the terms and conditions relating to the annuity preclude the commutation of the annuity into a lump sum grant and the annuity, therefore, satisfies the description given in Section 2(e)(iv) and is entitled to exclusion from the computation of net wealth under the Act.

10. Our answer to the question referred to us is, therefore, in the affirmative. The Commissioner will pay the costs of the Reference to the assessee.


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